Weekly Update

The Housing Boom Has Just Begun


Published April 23, 2021

Some long-term investment models say that we have just begun a new secular bull market. A secular bull market is one with years of rising stock values ahead. While stock valuations currently seem quite high, rising and recovering corporate earnings will help bring those valuations somewhat back down to a more normal range. One factor behind the longer-term market optimism is the shifting demographics at play in the U.S. The article below from DIM provides a good overview of this shift. We are witnessing the fingerprints of this shift right now as demand for houses substantially outstrips supply. The “Millennial” age group is entering their prime earning years. As parents of children in this economic coming-of-age, we see firsthand these shifts – where apartment living is giving way to a desire for owning a home, building a family, and all the spending that goes along with that phase of life.

The housing supply problem shows the remnants of the financial crisis. That crisis, delivered on the back of housing finance, sapped financing and enthusiasm from the housing sector for a decade afterward. It is always that way – e.g. the sector at the root of the prior crisis falls out of favor for the following cycle. It happened to tech stocks after the dot.com bubble busted. It happened to finance and housing after the 2008 crisis. Coming out of the pandemic, we have no particular stock market sector at fault. So, we have seen broad-based buying of stocks in almost every sector, with a steady rotation among sectors as money seeks value. Housing and finance are poised to return to favor as the psychic wounds of the financial crisis fade.

Herewith the analysis from DIM:

“Modern stock market history is often referred to as beginning at the end of World War 2. The Baby Boom generation (roughly 69.6 million people) is comprised of people born between 1946 and 1964. Baby Boomers dominated economic activity during the second half of the 20th Century. Baby Boomers were some of the most voracious consumers buying cars, TVs, homes, etc. like never before. The great bull market of the 1980s and 1990s reflects much of the consumption appetite of Boomers.

The youngest Baby Boomers are now in their late 50s. Baby Boomers are no longer making babies and buying homes for the first time. Many are downsizing.

We are two decades into the 21st Century and the Millennials (born between 1981-1996, roughly 72.1 million people) are beginning to carry the consumption mantle. We are on the front edge of a Millennial consumption wave that could provide a tailwind to economic growth for years.

The average age of the first-time home buyer is 34 years old according to Zillow. When we look at the U.S. population by age, the largest cohorts are between ages 28 and 30 — roughly 15 million people.

Large Demographic Tailwind Has Arrived

For the next decade or two, Millennials will drive economic growth, especially in the housing sector. U.S. homebuilding surged to nearly a 15-year high in March. Millennials are forecast to add almost 25 million new households through 2028.

30-44 Yr. Population and Housing Starts

In the first two decades of the 21st Century, the US population expanded by 46 million people but only 20 million housing units were built. There is a demand/supply imbalance between the rising Millennial demand wave and the total supply of housing.

Home buying (household formation) drives consumption. Homes have to be furnished and improved. Cars, TVs, washers and dryers have to be bought. Families have children and children drive additional consumption.

The long-term investment landscape is influenced by demographics. Baby Boomers may develop a deeper appreciation of Millennials in the next decade as it will be principally Millennials who foster economic growth in the U.S. and provide a tailwind to higher stock market values over time.”

As optimistic as the shift in demographics is, there will always be ups and downs along the way, as there have been for the past two decades of TimingCube’s existence. We will rely on our models to keep us invested when we need to be, and cautiously on the sidelines when risks run high. More aggressive subscribers can seek to take advantage of those weaker market periods by shorting the market during our SELL signals.

Market Update

The second week of quarterly earnings announcements brought a mixed bag with earnings almost routinely strong, but market reaction often puzzling. Stocks began the week on a cautious note with the S&P 500 dipping -0.5%. Rising covid-19 cases and slow vaccine rollouts outside the U.S. have reminded investors that the pandemic remains a threat. Tuesday brought another -0.7% slide as airline stocks reacted poorly to earnings. Investors are beginning to believe that the lucrative business travel segment will not return quickly as employers and employees have become quite used to virtual meetings and conferences. After the close, one of the beneficiaries of the homebound year, Netflix, reported earnings. The company substantially missed subscriber growth numbers. While that report pressured the Nasdaq early Wednesday, investors gathered themselves to buy the dip and send markets higher by +0.9%. The positive push continued until Thursday afternoon when a report discussing a possible hike in capital gains taxes unnerved investors. The reaction was a swift drop to a -0.9% close. A series of strong economic reports and clearer perspective on the possible tax hike brought buyers into the market Friday. Poor earnings reports from Intel and Kimberly-Clark failed to dampen the Friday rally. The Nasdaq popped +1.4% in the session.

Stocks slipped for the week, but recovered well off their lows. The S&P 500 (SPY) ended the week almost flat with a -0.12% move. The Nasdaq 100 (QQQ) was lower by -0.76%. Smallcap Russell 2000 (IWM) recovered to a gain of +0.49%.

Warm wishes and until next week.